Dialogue: Technology investors watch and wait for tax carrot

By JASON M. NEAL*

Budget and pre-Budget announcements were a step in the right direction for New Zealand's IT sector.

However, the 100 per cent R&D deduction and $100 million allocated to assist seed-stage businesses, and the local venture capital industry, are not enough.

If New Zealand's IT industry is to capitalise on its innovation and passion for new and advancing technologies, the Government must take stronger measures in the immediate future.

The keys to building a successful company are access to sufficient capital, skilled resources and experienced management.

When these elements come together in the IT sector, any viable idea can become a global success within a relatively short time.

The rewards extend beyond a single entity to stronger economic stability, consumer confidence and global recognition. Ireland is the perfect example.

Ireland is a rags-to-riches story. Before reducing its corporate tax rate, Ireland faced the same fiscal and emigration issues New Zealand is contending with today.

Since reducing the tax rate to 10 per cent, Ireland has positioned itself as the fastest-growing economy in the OECD and has out-competed the United States to become the world's leading exporter of software technologies.

This strategy did not jeopardise fiscal policy. To the contrary, it led to securing billions of dollars from overseas investors, without giving up national assets.

Tax revenues exceed all expectations, and Irish professionals are returning home to competitive salaries and an exciting future.

During a discussion with a Labour Government official, I was told that the Labour Party wanted to expand its IT industry but it did not want New Zealand to become a manufacturing state, which is how this person perceived Ireland.

Although the New Zealand Government's 100 per cent R&D deduction will assist new businesses, it will play a minor role in attracting offshore funding.

The objective of any investor is to maximise the return. In the IT sector, this is often based on projected earnings once a product goes to market. Although the R&D deduction will have an impact on a company's profits, it is insignificant when compared with a venture capitalist's expected earnings.

Last year, the US venture capital community invested $US103 billion ($246 billion) in emerging enterprise. Of the 5458 companies receiving funding, 22 per cent (1200) were start-ups, each receiving an average $US15 million.

What the New Zealand Government appears to be overlooking is that its $100 million contribution to building local IT and venture capital industries equates to less than what three start-up companies received in the US last year. That is an example of what New Zealand businesses are up against, when trying to compete globally.

I remain astounded at the Government's intent on supporting an Israeli-style venture capital scheme. It puts taxpayer money at risk, which could certainly be better spent, and I do not know of a prominent venture capitalist in the United States or Europe who would partner with a government no matter how much at arm's length they intend being.

Realistically, if New Zealand is to reach its economic and strategic objectives, significant funding is required from these and other overseas regions.

A good example of the reality facing New Zealand is provided by my proposed technology park planned for Queenstown.

The technology park will be mainly a facility that takes 10 to 15 IT companies through the start-up phase, before replacing them with new ventures. Adequate funding, professional advisers and required services will be provided on site in conjunction with a US-based subsidiary. Each company will eventually leave the facility and be assisted with establishing a corporate presence in New Zealand, and securing a competitive position in each of their global markets.

Unfortunately, this venture had to be put on hold when we realised New Zealand's tax policy would not compete with other countries, including Australia's.

For the past four years I have been waiting until New Zealand was ready for this project.

The investors are ready, but repeated efforts to persuade the Government to consider a reduced corporate tax rate have fallen on deaf ears.

If the corporate tax rate is reduced and opportunities are acted upon, New Zealand can become the Southern Hemisphere's dominant IT player.

However, the window of opportunity is diminishing each day, and unless competitive steps are taken by the Government, New Zealand may just become a manufacturing state of Australia.

* Jason M. Neal, an expatriate New Zealander, is president and CEO of Technology Park Project (NZ).